Short practical guide on how to create a simple but effective pricing strategy for your hotel
In this article we will talk about a possible basic strategies to follow to correctly set rates and prices for your accommodation.
This need arises from the desire to apply a hotel tariff policy that is weighted and based on cost analysis, these values must be analyzed carefully in order to create a correct hotel management strategy.
The rules vary, depending on the context in which the structure is located and its type: so, for example, a business hotel in a Fair Area will follow different paradigms compared to a boutique resort in the hills of Tuscany. Despite this we want to try to define some basic lines that can be applied by most hoteliers.
Difference between “fare” and “price”
Let’s start from the basics, let’s immediately clarify by defining what is the difference between the concept of “fare” and “price“.
The price is the economic amount to which we sell an accommodation for a given combination of rate and day, while the rate is the composition of name, booking conditions and basic treatment.
So to give a practical example a rate can be called “Non-refundable Bed And Breakfast“. As you can guess from the name our rate “Non-refundable Bed And Breakfast” will most likely be a rate that provides as a basic treatment that of “stay and breakfast” (BB) that once booked does not offer free cancellation.
How to define rates: a practical example of strategy
Let’s go straight to the practice, as a prerequisite to simplify we assume that your accommodation does not have a restaurant or, even if it had, imagine that you prefer not to sell together with your stay half board (HB) or full board (FB).
We therefore want to sell only the RO treatments (room only) and BB (Bed & Breakfast).
The first thing to do is to create at least 4 rates in the management software of your hotel:
| Trattamento | Nome Tariffa | Condizioni |
|---|---|---|
| RO | Room only | Free cancellation within 7 days, 1 night charge for cancellations within 6 days |
| RO | “Non-refundable” room only | Advance payment, cancellation not provided |
| BB | Bed and Breakfast | Free cancellation within 7 days, 1 night charge for cancellations within 6 days |
| BB | Bed and Breakfast | Prepayment, cancellation not provided |
What is described in the table above is a standard configuration, to which must be added, however, the important condition of automatic closure of non-refundable rates. The closing of the rates can be set for 15 days before the reservation date. Obviously, non-refundable bookings must provide for a discount on the “sister” reimbursable rate.
Therefore, non-refundable bookings will only be available if the reservation is registered at least 15 days before the check-in date.
This precaution is necessary to avoid the sale of non-refundable “below” rates, making “normal” rates less and less relevant and convenient for the customer.
What do we want to say?
The probability that guest Mario Rossi will cancel a reservation made 2 days before his check-in is much lower than that of a booking registered 2 months in advance.
But not only that, by encouraging early bookings with a discount, the hotelier registers more early bookings and thus has more time to plan and optimize.
How to set prices.
Best Available Rate (BAR), Rack Rate e Bottom Rate
Once the rates to be sold have been defined, we need to understand what prices to apply in order to be competitive and profitable.
The study of the right price is not trivial and to be taken lightly because this depends on many factors not all easily measurable.
Sometimes this aspect is seen as the bare and raw rate management, that is the price reduction carried out by the hotel owner in a certain period of the year to mitigate a forecast of low employment, but it is absolutely not like that!
Very often we find ourselves talking to receptive structures that set their prices by shaping those of a competitor. This strategy is not entirely wrong but it is potentially very dangerous.
We consider it dangerous mainly because the resulting prices do not derive from a calculation based on our own numbers but on impressions.
We explain better, when we say calculation “based on numbers” we mean that a hotel should firstly carry out a study of company costs in order to know its cost items (fixed and variable) and, based on these, calculate the Bottom Rate, that is the minimum price at which it is convenient to sell a room. Going below the “bottom” price, costs are higher than earnings and it is not cheaper to sell.
| Fixed costs | Fixed costs are those costs that are not affected by the greater or lesser presence of guests, for example: costs for rent or salaries for staff. |
| Variable costs | Variable costs are determined by the presence or absence of guests and may be laundry and linen costs or raw materials related to breakfast / buffet. |
| Bottom Rate | Price below which to sell a room becomes anti-economic |
Attention to image damage
To be precise, we can say that in some cases the calculation of the bottom rate not only looks at the balance sheet numbers of the hotel but also takes into account the damage of image caused by selling housing at a price too low.
BAR (Best Available Rate)
From the diametrically opposed side we have the Rack Rate, this is the maximum price at which you want to sell a specific accommodation.
Between these two values, which obviously vary by room type, we find the “BAR” or the “Best Available Rates“. These are the sales prices of a room for a certain day.
These BAR prices for a given day vary (going up and down) based on factors such as:
- Occupancy rate;
- Season or day of the week;
- Events and manifestations.
So once the hotelier has “carved into the rock” what are the minimum (bottom) and maximum (rack) prices for him, the application of prices (ie BAR) is done on the basis of market factors.
In the example below we are going to show 3 different price ranges that can be applied to the same accommodation. Generally, the number of BARs with which an average accommodation facility operates is around 6-7, so as to give the hotelier the opportunity to appropriately price the price based on the business trend.
| Room type | Best Available Rate name | 1 adult | 2 adults |
|---|---|---|---|
| Double room | BAR 1 – low inflow (bottom rate) | 89€ | 169€ |
| Double room | BAR2 – medium inflow | 99€ | 189€ |
| Double room | BAR3 – high inflow | 119€ | 219€ |
| … | … | … | … |
How to set your own rates on OTA portals
The OTA portals are a very valid partner for the hotel, which offers an indispensable sales window for many hoteliers, but it is important to set up your hotel in a thoughtful way.
The first basic rule is to never sell at lower prices on portals than your booking engine or even compared to telephone/email bookings. For this reason, a strategy that the hotelier can follow may be to choose not to sell the “non-refundable” and/or “room only” rates on the OTA portal.
Our suggestion
In the case of the above example in which we created 4 rates, a strategy that we recommend provides for the sale on the OTA portals of a single rate or the repayable B&B rate, applying the same prices on the OTA portals on the booking engine, but also the exact same cancellation conditions (thus respecting the rate parity).
On the booking engine, however, it will be possible for the traveler to purchase a room at a lower price by choosing the room-only rate and the other 2 non-refundable rates. In this way, the user gives evidence that by booking directly, one has, if nothing else, a wider choice and convenience.
How to interface the management software and the Channel Manager
The above can be easily configured in a modern hotel management software such as Slope.
The power of a modern management software lies in the possibility of defining the rate and price rules in the configuration phase of its management, once connected to the channel manager Slope the OTA portals, the system will work automatically synchronizing reservations, prices and availability on all the sales channels of the hotel (direct bookings, OTA, booking engine) following the desired rules!
